How Online Checking Accounts Work

Online banking allow you to manage your money from any computer with an Internet connection. See more banking pictures.

Nobody likes waiting in line at the bank, and even if you're patient enough to cope with the long line at the teller's window bank hours aren't the most convenient. Online banking allows you control of your money from anywhere with an Internet connection, even your smartphone, but how hard is it to get started, and is your money really safe? We'll take a look at the ins and outs of online checking accounts and find out.

Online banks allow you to manage your money from any computer with an Internet connection and often via your smartphone, offering services like paying bills, transfers, and sometimes even ATM fee reimbursement. You can set up your online checking account either through a brick and mortar bank or an online-only bank. Most traditional banks also offer online banking features tied to a regular checking account, so that you can access your money at a branch, an ATM, or online.


Online checking accounts are gaining popularity as consumers become more comfortable with doing things on the Internet. In fact, an American Bankers Association survey showed that 62 percent of people preferred banking online more than any other method, up from 36 percent the year before [source: American Bankers Association]. Online-only banking is also on the rise [source: Todorova].

Online checking accounts offer ready access to your money. They are easy to set up, though some people do have concerns about dealing with online banking, particularly in the area of security. Others are not comfortable with computers and prefer doing their banking in person, via the ATM or through telephone customer service. Let's take a look at online checking accounts and see how you set one up, what features they offer, and how to securely manage your money in an online environment.


How to Open an Online Checking Account

One major difference with online checking accounts is that many of them will pay interest, while interest-bearing checking accounts are rarer at old-school banks [source: Todorova].The different types of online checking accounts are just as varied as the different types of checking accounts that you can get at a more traditional bank. You can find familiar account types, like free checking or business checking accounts or some more unusual account types.

One unusual account is for people with credit problems: the "prepaid card account." These accounts are basically a prepaid debit card that you can refill, but it acts like a bank account. For example, you can still set up direct deposit into your prepaid card account and even write checks [source: iBank Up]. Some banks specialize in what's known as "second chance" online checking accounts. Aimed mostly at people with bad credit or who are in the Chex System for writing too many bad checks, these usually have more fees attached but can help customers rebuild credit [source: Zhen]. If you're in better financial shape, you might look at rewards checking accounts. Rewards accounts offer even higher interest rates than other interest-bearing online checking accounts, but you usually have to meet more criteria to qualify, like a certain number of debit card purchases each month [source: Ken].


Different banks have different procedures for opening an online account, but if you're going to be doing your banking online, there are a few things that are pretty standard. Web site. You'll need to provide information like your full name, date of birth, social security number, and a form of identification. Many online applications use your driver's license number instead of the real deal. You'll also need a valid email address, since this is most likely how the bank will communicate with you. If you already have account through a brick and mortar bank, you simply register for online access to your bank account, and provide a username and password.

If your new account is strictly online, you'll need to deposit money to open the account, either through a transfer from your current bank, with a check card, or via a check or money order that you mail to the bank. The amount of that initial deposit varies, depending on the bank you choose and the sort of account you open.

Online checking accounts offer a few features that aren't always available with a typical checking account. We'll talk about what perks to expect from online banking on the next page.


Online Checking Account Features

Online checking accounts have many of the same features as more conventional accounts, but there are a few special features that come only with online checking.

"Online bill pay" is a common feature with online checking accounts. Instead of using a payment system or sending checks to your creditors through the mail, you can transfer the funds electronically through your bank, using funds in your online checking account [source: Nationwide]. The beauty of online bill pay is that you can avoid the cost of stamps and any fees from third-party payment programs that many companies and utilities use to accept your monthly payments. The money will also be delivered to the creditor usually in one or two days, as opposed to the five to seven days when a check is mailed.


Some online accounts offer rewards programs tied to debit cards too. Not to be confused with a rewards checking account, these programs allow you to earn points for purchases and redeem them for goodies [source: Wang].

One of the major drawbacks with online-only banks is that it can take much longer to deposit a check. Without a physical location or ATMs, the only option used to be mailing any checks you receive to a central depository. However, many banks, both online and traditional, now offer "mobile deposits" to make depositing checks much faster. Using the bank's smartphone app, you snap a photo of the check you need to deposit, and the bank uses the image to deposit the funds for you [source: Block]. Of course, there's still a delay as the funds clear, but it's much faster than mailing things in.

Banking online can be convenient, but there will be times when you need access to cash. Because online-only banks don't have physical locations, they'll often offer ATM fee reimbursements. Usually, they'll only reimburse a certain number of transactions each month. Fee reimbursement is becoming so common that even banks with brick and mortar locations are starting to follow suit [source: Wang].

How do you manage your money in an online account, and is your money safe there? We'll look at how deposits, transfers, and security work on the next page.


Depositing and Transferring Money with Online Checking

To get money into your online account, you've got a few options. Most people are already familiar with direct deposit: Instead of receiving a check from your employer or payee, you give them routing information, so they can deposit your money directly into your bank account. You can also deposit checks by taking a photo of them with your smartphone [source: Block]. If you're depositing cash, you can either buy a money order and mail it in or deposit the cash into a traditional bank account and transfer the money.

Got more than one online account? One area where online banking is very convenient is transfers. With an online account, you can do it with just a few clicks on the bank's Web site(s). If you're trying to move the money from one bank account to another you can transfer between accounts at the same bank for free. If you're transferring money to another bank, you may have to pay a transaction fee [source: HSBC].


Even if you do most of your transactions online, from time to time you're going to need checks. Online only banks do offer paper checks. Some will send you a checkbook, while with others you fill out your check online, and they mail the paper check to the payee for you.

Whether you're depositing, withdrawing, or moving your money around, you want to be sure that your online checking account is safe and secure. As with anything online, security is a concern, and there are hackers out there who try to get into online bank accounts. Banks use heavy 128-bit encryption to protect customers from getting hacked, and while banks do sometimes have their databases compromised, it's a relatively small number compared to how many customers bank online. Even then hackers don't always get all of the information they need to steal your identity [source: Nicholson].

You actually have a lot of the control over your account's security. Here are a few ways to make sure your online banking stays safe:

  • Choose a secure password. Many banks require that passwords contain one or two numbers. Don't choose an obvious password, and change your password periodically.
  • Watch out for "phishing" scams. Phishing is a type of Internet fraud involving spam or pop-up messages designed to gather personal information and help hackers get into your accounts. Never give out personal information via email. Instead, go to the bank's Web site directly (not by clicking any links in the suspicious email), and contact its customer service department using the email address or phone number on the site, to make sure you're really dealing with your bank [source: APWG].
  • Make sure your deposits are FDIC-insured. You can use the Bank Find database to check if your bank has insurance to protect you in case they go under [source: FDIC].
  • If your online account comes with a debit card, you'll also have a PIN number. Change your PIN number periodically, and don't share it with any third parties.


Lots More Information

Related Articles

  • Air Banking. "big airchecking." (October 10, 2011)
  • APWG. "Consumer Advice: How to Avoid Phishing Scams." (October 4, 2011)
  • Block, Sandra. " No Bank? No Problem. Phone Apps Let You Deposit Checks." USA Today. July 14, 2011. (October 4, 2011)
  • FDIC. "Safe Internet Banking." (October 4, 2011)
  • HSBC. "Bank to Bank Transfers." (October 4, 2011)
  • iBank Up. "Virtual Checkbook." (October 10, 2011)
  • ING Direct. "Online Check Ledger." (October 10, 2011)
  • Johns Hopkins Federal Credit Union. "Privacy" (October 4, 2011)
  • Ken. "10 Common Traits of High-Yield Rewards Checking Accounts." April 25, 2011. (October 4, 2011)
  • Marquand, Barbara. "Online Savings and Checking Accounts Grow in Popularity." January 26, 2011. (October 4, 2011)
  • Mui, Ylan Q. "Banks Allow Ads in Online Checking Accounts." The Washington Post. January 17, 2011. (October 4, 2011)
  • Nationwide. "Nationwide Bank Glossary." (October 4, 2011)
  • Nicholson, Chris V. and Dash, Eric. "Citi Says Credit Card Customers' Data Was Hacked." New York Times. June 9, 2011. (October 4, 2011)
  • Todorova, Aleksandra. "Online-Only Checking Pays More, but Has Drawbacks." SmartMoney. June 6, 2007. (October 4, 2011)
  • Wang, Jim. "The Newest Features of Online Checking Accounts." U.S. News and World Report. September 8, 2011. (October 4, 2011)
  • Zhen, Simon. "BBVA Compass Bank to Raise Fees on Checking Accounts." MyBankTracker. September 6, 2011. (October 4, 2011)